Harvey Jones

This year's volatility is showing us the importance of portfolio planning

When stock markets go haywire as they often do, it helps if you have drawn up a plan for your portfolio and can stick to it.
If you don't, you could find yourself at the mercy of events, and make rash, panicky decisions that only add to your losses.
By drawing up a sensible strategy for your savings and investments, you can look past short-term volatility and focus on your long-term goals.
The problem is that many investors consider planning to be the least interesting part of investing, and never quite get down to it.
It's a lot more exciting snapping up some whizzy tech stock or crypto millionaire maker, than building a balanced, diversified blend of asset classes including shares, bonds, cash, property, gold and commodities.
The result is that too many end up with a ragbag of once fashionable investments that are down on their luck, like, say, Tesla and Bitcoin. Or some meme stock you bought for reasons you can’t remember.
Buying on a whim rather than following a plan typically leaves investors short on exposure to the solid, low-risk investments that rarely hit the headlines, but prove their worth when the going gets tough.
If you have never drawn up an investment plan or have forgotten what yours was, it’s time to go back to the drawing board.

Time to get back to basics

The first step is to decide why you are investing. Your portfolio will look different depending on whether you are saving to meet a short-term expense, such as a property deposit or school fees, or a long-term goal like retirement.
Age also plays a part. If investing for retirement, younger investors can afford to put more of their money into riskier assets, because they have time to recover from a crash.
Older investors have traditionally dialled down the risk as retirement looms, by shifting into bonds and even cash deposits.
Yet this is less common than before, as many now stay invested to benefit from market growth over a retirement that could last 20 years or more, while drawing income and lump sums as required.
Your personal attitude to risk will also determine how you draw up your plan. When asked, most private investors define themselves as being "medium risk", but what does that mean in practice? As a rough guide, if the idea that your portfolio fall by, say, 25% in a matter of days gives you sleepless nights, then tone down your equity exposure.

Check how well your plan is working in reality

Once you have your plan, review it every year but resist the temptation to tinker endlessly, says Emma-Lou Montgomery, associate director at fund manager Fidelity International.
Check your funds and shares are still performing as you anticipated, and consider rebalancing to avoid too much exposure to a single, successful sector.
Many advisers suggest doing this systematically, by selling some of your top performing holdings once a year, and investing the proceeds in your laggards.
It’s called selling high and buying low, and can help you resist the temptation to run your winners for a little too long.
Just make sure you do not rack up tax and trading charges by doing so.

Stick to plan when times get tough

When stock markets fall or money is tight, resist the temptation to stop your monthly contributions altogether, Ms Montgomery says.
Even pausing for a year or two can have a huge impact on your retirement pot, as you will lose all future compound growth on your contributions.
This is particularly important with company pensions, as you may lose employer contributions if you stop paying in yourself. “If money is tight, examine your shopping and spending habits, and look for other ways of cutting your costs,” Ms Montgomery says.
Avoid the temptation to time the market in a bid to make a quick profit from short-term movements, advises Christopher Rossbach, chief investment officer at Luxembourg-based J. Stern & Co. “Making sustainable long-term returns means investing in great companies at good prices and holding them for at least five to 10 years, or even longer.”
Stock markets regularly suffer significant pullbacks, but history shows they invariably recover within five years, and often sooner, he adds.
Mr Rossbach’s analysis, which dates back to 1972, shows that investors who bought and held US stocks through thick and thin rarely generate less than 8% a year. “That applies even if they bought ‘too early’ or directly before a major market decline.”

Time the market after it moves rather than before

Instead of selling when share prices crash, turn volatility to your advantage and buy instead.
“Bear markets like the one we have just seen offer opportunities to buy quality stocks at cheaper prices,” he says.
Investors who were brave enough to buy US shares in the recent bear market will be comfortably ahead, even after the summer rally faded. “Amazon, for example, is still up around 25% from its June lows. LVMH, is up around 17% and Nestlé around 6%,” Mr Rossbach says.
Buying the dip is different to timing the market because you are taking advantage of a move that has already happened, rather than trying to second-guess where equities go next.

Your plan should see you through tough times

With war in Ukraine, energy shocks, supply chain problems and soaring inflation, this year’s troubles are multiplying
If your plan is robust, now is the time to show some faith in it. “Quite simply sit tight, stay calm and ride out the storm,” says Bevan Blair, chief investment officer of One Four Nine Portfolio Management.
Selling investments in times of trouble gives investors the false notion that they have some control over market movements. “Avoid rash decisions, but view the situation with a long-term lens and a level head,” Mr Blair says.
It's a lot easier to keep your nerve and stick to the plan if you have drawn one up in the first place.
So what's yours again?


Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.


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Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.

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